A Bullish Bias

In Doug Kass's column outlining his bearish view of the market, he makes the following statement: "The price charts are a picture of what has happened in the past and don't indicate with precision what will happen in the future."

That is an interesting observation, echoed by many who lean toward a fundamental approach to the market. Obviously, past results are no guarantee of future performance (as they say in advertisements for mutual funds and other financial products), so why use charts at all?

Despite an endless search by market players since the advent of trading, there is no perfect indicator. Nothing can predict the future with any great precision. The best we can hope to do is find something that will provide clues as to how events may play out. Fundamental investors tend to believe that the best indicator of how a stock will act is its past financial results. They extrapolate the future, apply a multiple and then wait for the market to appreciate their wisdom.

People are often very wrong about fundamentals, but because it is based on accounting, spreadsheets, budgets, management and the like, many feel as if they have an edge in these matters.

The technical trader tends to believe that charts are good predicative tools because they tell you what big investors tend to think about the fundamentals. If a stock is going up on big volume, it is because someone with lots of money and good research believes the stock will go higher. The past price action matters because it provides clues to the emotions at work.

I see charts as the best evidence we have as to the market's mood. They are a study in psychology and, while they aren't precise, they do have strong tendencies that give you an edge when you are trading.

Right now, the charts indicate that there is little to worry about, which is exactly what Doug Kass says is so bearish. He doesn't need to dismiss the charts to make his point; they reflect exactly what he says about complacency. My view is that there may be complacency in the market, but it isn't sufficient to produce a top at this time. In my experience, it takes much more than this level of positive action and sentiment to produce an extreme that warrants selling. Doug and I see the same things in the charts, but we interpret them differently.

I'm maintaining a bullish bias until I see something in the charts to change my mind.